Like many potential early retirees I have most of my money tied up in tax deferred retirement accounts that aren't easily accessible until 59.5. So my ER schedule is driven by not wanting to do a 72t and saving enough into accounts that I can get at without penalty before 59.5. Early next year I'm going to ER , but I wanted to see what you make of my AA and strategy for the years up to 59.5

I have $775k in retirement accounts that I don't want to touch until 59.5 and $230k in funds that I can access with no penalty.

I own a two family, have no debt or mortgage and get $1200/month in rent. My monthly expenses are $3k so I have to produce $1800/month from a combo of principal and gains. My current AA is as follows and I'd be interested in suggestions to tailor it to produce retirement income for 7 years. What is the balance between cash/fixed income/equites that you'd use?

assuming 3% inflation, 2% return from the stable value fund and 5% from the equities and REIT things look good on my spreadsheet. But I could also fund the 7 years by being conservative and just putting everything in the stable value and short term bonds or CDs.

Last edited by nun on Wed May 22, 2013 12:05 pm, edited 1 time in total.

My suggestion would be to lay out a plan based on keeping yourself in the 15% tax bracket. $36,250 in taxable income is the top of the 15% bracket. At a minimum you get a $3,900 personal exemption and the standard deduction is $6,100. So your income can be about $46,000 and still be in the 15% bracket.

Unless there is other information that modifies this substantially, you should be able to withdraw some funds from your 457 and remain in the 15% bracket. In the 15% bracket you can also take long term capital gains and pay no taxes. Your lowest cost approach in terms of spendable income would be to take funds strictly from your taxable account while preserving your desired AA by rebalancing in your other accounts. At the 15% rate, supplementing with a small withdrawal each year from your 457 is also not a bad option.

In terms of overall asset allocation, since you own a rental property, you do not need the diversification that REITs offer. If your stable value is paying a decent rate, at a minimum I would put the REIT allocation into stable value. (My stable value fund is still paying 3.5%, my wife's is still over 4%.)
I wouldn't go the conservative route that you suggested, but I would increase my allocation to stable value. . . I'm advising this in light of the fact that we don't know what your other tax deferred investments are. Having at least 3-4 years of income in stable value ($60k to $80k) would be prudent and would provide you with the option to not sell the bulk of your equities if they were to drop substantially. With the 7 year time horizon you are proposing, most of your equity allocation should be in the tax deferred account anyway.

[Note - you were posting about the rental income while I was writing. With the rental property write offs you should be well below the top of the 15% bracket.]

BolderBoy wrote:Without knowing more about your situation, my back-of-the-envelope guesstimate is you will be cutting it close to make this work out. Are you planning to take SS at age 62?

I'd be nervous like a long-tailed cat in a room full of rockin' chairs...

I'll be taking SS at 66 or 70. At 59.5 I will begin taking money from my IRA/403b etc accounts which shouldl be in the region of $1M by then. Right now I'm interested in how to arrange the $230k that I can access without penalty before 59.5 to generate and inflation adjutsed $21.6k a year for 7 years. It's more than enough to do that by using a combo of my stable value fund and CDs.....but should I also have some in equites?

I would consider putting the foreign/internation equity allocation into US domestic large cap that pays a good dividend. I doubt you're getting much dividend from your foreign equties, but I could be wrong about that. Anyway, best of luck. It looks like you've considered this thoroughly.

nun wrote:I'll be taking SS at 66 or 70. At 59.5 I will begin taking money from my IRA/403b etc accounts which shouldl be in the region of $1M by then. Right now I'm interested in how to arrange the $230k that I can access without penalty before 59.5 to generate and inflation adjutsed $21.6k a year for 7 years. It's more than enough to do that by using a combo of my stable value fund and CDs.....but should I also have some in equites?

Ah, I think I see what you want to do now (I'm doing something similar, actually.) 7 years to get you to 59.5 should be a slam dunk if nothing changes - healthcare taken care of? I don't think you need to risk the after-tax money very much.

In my I happen to have most of my split between Tax-Exempt Limited Term and Total Stock Market Index (part of my overall 40/60 AA.)

BolderBoy wrote: 7 years to get you to 59.5 should be a slam dunk if nothing changes - healthcare taken care of?

Yes, right now I will get good insurance through work at a cost of $100/month, but there is a move to change that so just in case I have $500/month of my budget allocated to health insurance which will get me a mid tier "silver plan" from the "Massachusetts Health Connector".

OverTheHill wrote:I would consider putting the foreign/internation equity allocation into US domestic large cap that pays a good dividend. I doubt you're getting much dividend from your foreign equties, but I could be wrong about that. Anyway, best of luck. It looks like you've considered this thoroughly.

Yes that's a good idea. I can adjust my taxable and 457 investments to include cash, stable value and US/dividend equities and increase the international index holdings in my tax deferred accounts to keep my overall AA the same. How does this strike you as an AA to produce my inflation adjusted $21.6k a year fro 7 years.

BolderBoy wrote:Without knowing more about your situation, my back-of-the-envelope guesstimate is you will be cutting it close to make this work out. Are you planning to take SS at age 62?

I'd be nervous like a long-tailed cat in a room full of rockin' chairs...

I'll be taking SS at 66 or 70. At 59.5 I will begin taking money from my IRA/403b etc accounts which shouldl be in the region of $1M by then. Right now I'm interested in how to arrange the $230k that I can access without penalty before 59.5 to generate and inflation adjutsed $21.6k a year for 7 years. It's more than enough to do that by using a combo of my stable value fund and CDs.....but should I also have some in equites?

My advice: do not invent a strategy for the $230K in the 457+taxable in isolation.

I think you should have a long-term allocation strategy for your combined assets. And maybe you do, but you've hidden it from us. It could be as simple as
-- 50/50 equity/fixed income,
-- X% of equity in international,
-- rebalance annually.

Then, to the extent that it is compatible with your strategy, your various plan constraints, and tax/cost efficiency, put less volatile assets in the 457. (Bonds, stable value, etc). This improves your chances of not having to take the 72t or 10% penalty route, while leaving the long term investment strategy in place.

So for example, assuming I want/need an allocation to REIT, I would not put it in the 457. Roll the 401k to an IRA if necessary, and get your REIT there.

House Blend wrote:
My advice: do not invent a strategy for the $230K in the 457+taxable in isolation.

I think you should have a long-term allocation strategy for your combined assets. And maybe you do, but you've hidden it from us. It could be as simple as
-- 50/50 equity/fixed income,
-- X% of equity in international,
-- rebalance annually.

Then, to the extent that it is compatible with your strategy, your various plan constraints, and tax/cost efficiency, put less volatile assets in the 457. (Bonds, stable value, etc). This improves your chances of not having to take the 72t or 10% penalty route, while leaving the long term investment strategy in place.

So for example, assuming I want/need an allocation to REIT, I would not put it in the 457. Roll the 401k to an IRA if necessary, and get your REIT there.

Well you pretty much got my overall (taxable, 457, 401a, 403b, ROTH and IRA) AA correct. It's 55/45 right now with about 15% in international equities. I could sell some bonds in my IRA and buy index equities so that I could go 100% Stable Value in the 457 and still keep the same overall 55/45 AA, but I think I'll keep the index equities in the taxable.

I like your second version better than the third. If I am correct in my assumption that you will be in the 15% bracket, you should be using a combination of capital gains and 457 funds to cover your expenses. With this approach leaving some equites in your 457 will allow for the possiblility of slightly higher yield in your "7 year accounts".
I think spending down about 1/7th of your taxable each year and suplementing with your 457 withdrawals will give you the most after tax income.

I would also suggest turning off your dividend reinvestment in your taxable account mutual funds.

BolderBoy wrote: 7 years to get you to 59.5 should be a slam dunk if nothing changes - healthcare taken care of?

Yes, right now I will get good insurance through work at a cost of $100/month, but there is a move to change that so just in case I have $500/month of my budget allocated to health insurance which will get me a mid tier "silver plan" from the "Massachusetts Health Connector".

i have a massachusetts health connector plan HNE silver 2000. works great. when you say 500 a month is that for 1?

my suggestion will be contrary to advice you have been given. mortgage rates are at record lows, i would get a loan on your rental for enough to tide you over. if you own a 2 family and take deductions for the rental part you could also deduct mortgage interest.

I suspect that you will be in a range where you end up in a high effective tax bracket when you start social security since every dollar of income above a certain level could make more of your social taxable.

If this is a problem getting more of the money out of the retirement accounts before your start getting social security using the SEPP/72t option might be worth reconsidering.

You could also live on your taxable accounts then do Roth conversions up to the top of the 15% tax bracket each year.

I suspect that you will be in a range where you end up in a high effective tax bracket when you start social security since every dollar of income above a certain level could make more of your social taxable.

If this is a problem getting more of the money out of the retirement accounts before your start getting social security using the SEPP/72t option might be worth reconsidering.

You could also live on your taxable accounts then do Roth conversions up to the top of the 15% tax bracket each year.

He won't have mandatory contributions until 70. he can just take enough from his accounts to make his taxes low if he is taking his ss at 62

I think there is an exception that allows you to withdraw your IRA's without penalty if they are taken in a series of periodic payments over your life expectancy, so you might consider doing that and take less from the 457 accounts.

It might be worth doing some Roth conversions. The converted funds can be taken out tax and penalty free after 5 tax years. If you can convert some funds, while staying in the 15% bracket, in your 52nd year then you have the option of taking additional withdrawals in your 57th year. This helps if the cash flow from taxable gets tight, and if not you can just leave the money in the Roth.

larryc wrote:I think there is an exception that allows you to withdraw your IRA's without penalty if they are taken in a series of periodic payments over your life expectancy, so you might consider doing that and take less from the 457 accounts.

Yes I could 72t, but I'd like to avoid that and I think it will be possible. I will also do IRA to ROTH rollovers up to the 15% tax limit. My $14.4k rental income and anything I take from the 457 will be taxable and as my income requirement is around $36k/year I should be able to rollover something at least as large as my deductions and exemptions.

The AA I'll have in the accounts that will fund from 52.5 to 59.5 is

$20k cash

$60k Vanguard Total Stock Market (taxable)

$150k Stable Value (457 plan)

So 26% equities, 65% stable value, 9% cash. In up years I'll take money from the equites and stable value to keep them in the same proportion to one another and keep the cash account at $20k. In down years for equities I'll only spend form the Stable Value. I'll also rebalance the rest of my portfolio as I take money out of the taxable and 457 accounts.